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2021 (7) TMI 615
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....g that the payments received by the Appellant for sale of software to Indian resellers/distributors/customers is in the nature of 'royalty' chargeable to tax under Section 9(1)(vi) of the Income-tax Act, 1961 (the Act' for short), and Article 12 of the India-USA Double Taxation Avoidance Agreement (DTAA'). 3. That the AO erred and the DRP further erred in failing to appreciate that notwithstanding the retrospective amendment made to Section 9(1)(vi) of the Act vide the Finance Act, 2012, the definition of 'royalty' under the DTAA has not undergone anyoApp,9e and that, therefore, the beneficial provisions of the DTAA would continue to apply in the Appellant's case. 4. That the AO erred and the DRP further erred in holding against the Appellant on the issue of taxability of the payments received by it for sale of software by merely following the orders passed by the Hon'ble High Court of Karnataka in the cases of Samsung Electronics Co. Limited, Sunray Computers Ltd. and Rational Software Corporation Ltd. as well as the order passed by the Authority for Advance Rulings in the case of Citrix Systems Asia Pacific Proprietary Limited, de....
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.... without prejudice to the other and the Appellant craves leave to add to, amend or delete all or any of the above grounds of appeal either before or at the time of hearing." 3. The assessee is a company incorporated in the United States of America and is engaged in the business of developing, manufacturing and distribution of software products. It had entered into agreements with distributors/resellers/customers in India for supplying software products and ancillary support services. The AO treated the same as royalty and charged tax both under the Income-tax Act and DTAA. 4. The same was confirmed by the CIT(Appeals) by following the judgment of the Hon'ble Karnataka High Court in the case of CIT v. Samsung Electronics, 345 ITR 494 (Karn), wherein it was held as follows:- "The Supreme Court, in Union of India v. Azadi Bachao Andolan [2003] 263 ITR 705/132 Taxman 373, has laid down that provisions of the DTAA prevails over the provisions of the Act if the provisions of the DTAA are more beneficial to the assessee. It is clear on perusal of the definition of 'royalty' under the Act and the DTAA that the definition of 'royalty' is restrictive in the....
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.... the rates in force unless he is liable to pay income tax thereon as an agent. Payment to non-residents by way of royalty and payment for technical services rendered in India are common examples of sums chargeable under the provisions of the Act to which the aforestated requirement of TDS applies. The tax so collected and deducted is required to be paid to the credit of the Central Government in terms of section 200 read with rule 30 of the Income-tax Rules, 1962. Failure to deduct tax or failure to pay tax would also render a person liable to penalty under section 201 read with section 221. In addition, he would also be liable under section 201(1A) to pay simple interest at 12 per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid. Therefore, if the amount is held to be royalty, the other consequences as referred to above would follow. [Para 17] In view of the definition of 'royalty' given in article 12 of the DTAA, it is clear that the necessary ingredient to be satisfied to find out as to whether the payment would amount to 'royalty' is as follows:- - payment of ....
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.... the licence fee to be paid by the distributor of the software as enumerated in the agreement. Further, clause 6.01 of the agreement dealing with title states that the distributor acknowledges that actuate and its suppliers retain all rights, title and interest in and to the original, and any copies (by whomever produced), of the software or documentation and ownership of all patent copyright, trademark, trade secret and other intellectual property rights pertaining thereto, shall be and remain the sole property of actuate. Distributor shall not be an owner of any copies of, or any interest in, the software, but rather is licenced pursuant to the agreement to use and distribute such copies. Actuate represents that it has the right to enter into the agreement and grant the licences provided therein and confidentiality is protected. Therefore, on reading the contents of the respective agreement entered into by the assessee with the non-resident, it is clear that under the agreement, what is transferred is only a licence to use the copyright belonging to the non-resident subject to the terms and conditions of the agreement as referred to above and the non-resident supplier continues t....
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....ct. However, if such copying of computer programme is done by a lawful possessor of a copy of such computer programme, the same would not constitute infringement of copyright and wherefore, but for the licence granted in these cases to the assessee to make copy of the software contained in shrink-wrapped/off-the-shelf software into the hard disk of the designated computer and to take a copy for back-up purposes, the end user has no other right and the said taking back-up would have constituted an infringement, but for the licence. Therefore, licence is granted for taking copy of the software and to store it in the hard disk and to take a backup copy and right to make a copy itself is a part of the copyright. Therefore, when licence is granted to make use of the software by making copy of the same and to store it in the hard disk of the designated computer and to take back-up copy of the software, it is clear that what is transferred is right to use the software, an exclusive right, which the owner of the copyright, i.e., the supplier owns and what is transferred is only right to use copy of the software for the internal business as per the terms and conditions of the agreement. [Pa....
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....and in the absence of licence, the same would amount to infringement of copyright, which is exclusively owned by non-resident suppliers, who would continue to be the proprietor of copyright. Therefore, there is no similarity between the transaction of purchase of the book or pre-recorded music C.D. or the C.D. containing software and in view of the same, the Legislature, in its wisdom, has treated the literary work like books and other articles separately from 'computer' software within the meaning of the 'Copyright' as referred to above under section 14 of the Copyright Act. [Para 24] It is also clear from the abovesaid analysis of the DTAA, Income-tax Act, Copyright Act that the payment would constitute 'royalty' within the meaning of article 12(3) of the DTAA and even as per the provisions of section 9(1)(vi) as the definition of 'royalty' under section 9(1)(vi) is broader than the definition of 'royalty' under the DTAA as the right that is transferred in the instant case is the transfer of copyright including the right to make copy of software for internal business, and payment made in that regard would constitute 'royalty....
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.... the non-resident is liable to pay tax under the charging provision contained in Section 9 read with Section 4 of the Income Tax Act, read with the DTAA. Thus, it is only when the non-resident is liable to pay income tax in India on income deemed to arise in India and no deduction of TDS is made under Section 195(1) of the Income Tax Act, or such person has, after applying Section 195(2) of the Income Tax Act, not deducted such proportion of tax as is required, that the consequences of a failure to deduct and pay, reflected in Section 201 of the Income Tax Act, follow, by virtue of which the resident-payee is deemed an "assessee in default", and thus, is made liable to pay tax, interest and penalty thereon. This position is also made amply clear by the referral order in the concerned appeals from the High Court of Karnataka, namely, the judgment of this Court in GE Technology (supra). 47. In all these cases, the "licence" that is granted vide the EULA, is not a licence in terms of Section 30 of the Copyright Act, which transfers an interest in all or any of the rights contained in Sections 14 and 14(b) of the Copyright Act, but is a "licence" which imposes restrictions or ....